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Management Accounting

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1 Management Accounting
By Ghanendra Fago [MBA, M Phil] (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

2 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) April 24, 2011

3 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) April 24, 2011

4 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) April 24, 2011

5 Branch of Accounting Cost Accounting Financial Accounting
Management Accounting (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

6 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) April 24, 2011

7 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 April 24, 2011 (C) 2011 Ghanendra Fago (M .Phil, MBA)

8 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) April 24, 2011

9 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) April 24, 2011

10 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) April 24, 2011

11 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) April 24, 2011

12 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) April 24, 2011

13 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) April 24, 2011

14 Differences Between Management And Cost Accounting
Basis Management accounting Cost Accounting Objectives Its objective is to assist managers providing accounting information for decision-making. Its objective is to determine and record the cost of production of goods and services. Scope It has broad scope, and includes financial and cost accounting. Its scope is limited in cost determination and record. Sources of data It uses both quantitative and qualitative data It uses the quantitative data only. Accounting principles No specific principles like accounting and cost accounting. Certain principles and procedures are followed in cost determination and allocation. Nature It uses past and present data in the projection of future. It uses both past and present data and figure. (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

15 Management Accounting Vs. Financial Accounting
Basis Management accounting Financial Accounting Objectives Assist managers at all levels i.e. internal users by providing necessary accounting information. Make periodical report Outsiders like shareholders, government, customers, suppliers, managers Sources of data It uses data, which are subjective, descriptive and related with future. It uses data, which are historical, quantitative , and related with past. Accounting principles No such principles for preparation and presentation of reports. Therefore, reports differ from one organization to another. Governed by GAAPs. Therefore, all organizations prepare the financial reports in the same manner. Reporting Reports are prepared in certain time interval according to need of management. Financial reports are generally prepared at the end of the fiscal year to report stakeholders. Legal compulsion It is voluntary. It is applied to increase management efficiency for attaining organizational objectives. It is compulsory in every business organization. Performance measurements It measures the efficiency and performance of various departments and divisions. It measures the overall efficiency and performance of organization. April 24, 2011 (C) 2011 Ghanendra Fago (M .Phil, MBA)

16 Behavioral implications
Secrecy Secrecy of report is compulsory because it is prepared for internal decision making for managers. Therefore, they are highly confidential. Generally, financial reports are published to the knowledge of the outsiders. Therefore, they are not secretly maintained as management accounting reports. Behavioral implications Measurement and reports are influenced by the behaviour of managers' daily behaviour. Therefore, behavioral considerations in primary in management accounting. Financial reports are prepared to measure and communicate the financial phenomena to the concerned parties. Therefore, behavioral implications are secondary. However, reports are influenced by the behaviour of executive managers. Span of Time It varies from one hour to many years. It is generally prepared on monthly, quarterly, half yearly and yearly basis. Scope/field Scope and field of management accounting are defined less sharply. Therefore, it uses economics, behavioral science and decision science. Scope is more clearly defined. Therefore, they use economics and other disciplines very low. April 24, 2011 (C) 2011 Ghanendra Fago (M .Phil, MBA)

17 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) April 24, 2011

18 (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011
Product A Product B Product C Product D Product E (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

19 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) April 24, 2011

20 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) April 24, 2011

21 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) April 24, 2011

22 Advantages of Management Accounting
Efficiency Planning and controls Performance measurements Maximize profitability Customers focus (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

23 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) April 24, 2011

24 Professional Certifications
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 (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

25 Historical Evolution of Management Accounting
Most of the product-costing and internal accounting procedures used in this century were developed s 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) April 24, 2011

26 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

27 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.

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

29 Advances in the Manufacturing Environment
The theory of constraints is a method used to continuously improve manufacturing activities and nonmanufacturing activities. Just-in-time manufacturing is 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.

30 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.

31 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.

32 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.

33 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.

34 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.

35 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.

36 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.

37 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) April 24, 2011

38 Assignment -1 Term Paper- Reviews of the Chapter Due in Next Class and
??????????? Quiz- I -Next Class Thank You ! (C) 2011 Ghanendra Fago (M .Phil, MBA) April 24, 2011

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